ING sees PH recovery, HSBC contraction

ING Bank Manila is seeing higher growth for the Philippines this year but banking giant HSBC thinks otherwise, forecasting a contraction.

ING said GDP growth this year will improve to 6.7 percent from its own estimate of 5.8 percent growth last year.

On the other hand, HSBC said growth will decelerate to 5.6 percent this year from its 5.7 percent estimate for last year.

HSBC economist Trinh Nguyen traced her pessimism to the continued fiscal deficit, policy paralysis because of the upcoming 2016 elections, negative real interest rates, and the bouncing back of inflation.

She said the controversy regarding the Disbursement Acceleration Program (DAP) means that government expenditure will not likely contribute to growth in the upcoming quarters.

Meanwhile, ING Bank Manila senior economist Joey Cuyegkeng was more optimistic, seeing consumption as this year’s growth driver. He said Philippine GDP growth will follow China’s growth for the year, which is forecast at 7.1 percent.
Cuyegkeng added that the recovery of the agriculture sector this year will provide additional support for the GDP.

“Private consumer spending [will be]assisted also by an 11 percent to 12-percent growth in the peso value of US dollar remittances (overseas Filipino workers and business process outsourcing) in 2015 and 2016. We expect agriculture to show some recovery from the very weak growth in 2014. Unemployment of 6 percent to 7 percent also helps the consumption side,” he said.

However, Cuyegkeng warned that government spending remains a risk to economic expansion as the bank’s growth forecast assumes some amount of recovery in the growth of government spending.

“With already more than year of an erratic record of spending growth, we expect government to have adopted measures to increase spending growth in the next two years,” he said.

Despite this, the ING Bank Manila economist pointed out that private sector construction growth is still likely to deliver a significant contribution to the sector.

He also sees public private partnership projects to move into some construction activity this year while construction in the business process outsourcing (BPO) sector and its supporting sectors is likely to continue.

In terms of external trade, Cuyegkeng said export growth is also likely to remain relatively strong with a 7-percent to 10-percent annual growth for 2015.

With the drop in global commodity prices and the underperformance of Asian currencies and commodities currencies, imports are likely to remain moderate and result in a more favorable net export contribution to overall GDP, he said.

However, the economist noted that one downside risk factor to the GDP forecast is power.

“The economy is likely to escape with a modest impact of a tight power conditions this year with appropriate contingency plans. New power capacities come in place late 2015 up to 2017. But an aging power plant profile requires additional investments in power capacity not only to replace ageing plants but also to support additional demand for power in the next five years,” he concluded.

DAP controversy
Meantime, HSBC’s Nguyen said the controversy regarding the DAP could weigh on spending and restrain growth.

“The DAP controversy could weigh on spending further. While positive from a sovereign risk perspective as the fiscal deficit is again likely to be much lower than expected, this should pose a drag on GDP growth well into 2015,” she said.

The economist said another risk will be policy paralysis because of the upcoming 2016 elections, with the expectation that public investment will slow while private consumption and private investment will pick up the slack.

“Should government spending slow more than expected and household expenditure weaken [not our assumption], growth may slow sharply,” she said.

Nguyen added that negative real interest rates will likely dampen capital inflows. HSBC expects the financial account will not receive the surge of net inflows that it had in the past four years, and foreign direct investment inflows will either stay flat or slow slightly.

“In environment of higher US interest rates and stronger US growth, albeit gradually, such funds will have less of an impetus to flow to the Philippines. While we do not see a sharp reversal of funds, we also do not expect large portfolio inflows in the next two years, especially for carry or growth differential reasons,” she said.

She also noted that inflation is another risk as the Philippines continues to face short-term supply shocks.

“For example, the government already projected an electricity shortage for 2015. The decline of oil prices has helped offset price risks from various supply-side constraints. However, should the [Philippine peso] weaken sharply and oil rise again, inflation could bounce back sharply,” she said.

Despite this, the HSBC economist believes that the central bank will do what it can to help by keeping policy rates on hold for longer, as long as inflation remains within the 2-percent to 4-percent target in 2015.